Since when do we believe the tobacco industry?

Ivo Vegter

Ivo Vegter

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

25 Nov 2014 12:10 (South Africa)

It’s a dark day indeed when a monopoly industry lobby and a media-sponsored organisation collude, and both agree with draconian government policy. That happened when Crime Line, an initiative of the Primedia Group, publicly supported the Tobacco Institute of Southern Africa during its conference about the fight against “illicit” cigarettes.

Despite the appearance of a hostile relationship, the tobacco industry and the government are partners in an unholy alliance. The industry is a massive cash cow for the government, and in return, it gets protection against upstart competition.

The Tobacco Institute of Southern Africa (TISA) is the tobacco industry association. It represents growers, merchants, manufacturers, importers and exporters, but mostly it represents British American Tobacco. BAT was once called the United Tobacco Company, which bought Rothmans, which used to be Richemont, which bought Rembrandt, or something like that. However it happened, it made the Rupert family astonishingly rich and dominates the South African market with a 95% share.

Government, of course, gets a generous slice of all this bounty. It imposes so-called “sin taxes” on cigarettes. The stated goal is to reduce the prevalence of smoking and thereby reduce the burden smokers place on public healthcare. The same motivation has prompted a raft of regulations about where smokers may legally smoke (almost nowhere), and how tobacco producers may legally advertise (almost nohow).

According to the National Council Against Smoking (NCAS), excise tax revenue more than doubled between 1993 and 2009 to about R12 billion, tobacco industry revenue grew by 69% and the number of smokers fell by a third over that time.

It is unclear whether the obvious correlation between higher taxes and lower smoking numbers establishes a causal link, however. Some studies claim so, but smoking rates have not declined equally across all demographics. Some comparable populations quit smoking at exactly the same rate, despite exposure to three different levels of tobacco control policy. This suggests that among some people, at least, smoking has become less popular for reasons that have nothing to do with taxation or legislation.

Whether or not taxes are effective, you have to admire the candour of former Russian finance minister, Alexei Kudrin, on government’s real motive for taxing easy prey: “People should understand: Those who drink, those who smoke are doing more to help the state.”

Now you might think that all these taxes and restrictions would be opposed by the industry. After all, if they have the desired effect, they raise the price of tobacco, reduce the number of smokers, and reduce the amount each smoker consumes. In every way, this is bad if you sell tobacco.

But no. TISA claims to support taxation and “sensible regulation”. Why would a profit-seeking industry which is not famed for its altruistic benevolence hold this view? There are three reasons.

First, it’s a lie.

“The tobacco industry has been ferocious in its opposition to any tobacco control measures, including excise tax increases,” wrote Corné van Walbeek, a UCT professor who specialises in the economics of tobacco control.

The anti-tobacco measures introduced since 1993 were two-fold: strict anti-smoking legislation, and rapid increases in excise tax on cigarettes. From the start, the industry tried to water down and delay these changes. Claiming now that it supports the rules is nothing more than smiling for the cameras.

(I should probably point out that I have no objection to the tobacco industry. I am an ex-smoker, but I have no problem with smoking. I still hang out on the porch with smokers. I like kissing girls who smoke. I allow it in my house and car. I respect people’s right to make their own decisions, and the right of tobacco companies to advertise and sell their wares to adults. Do you know militant ex-smokers? I’m the other guy.)

The second reason the industry claims to support regulation ostensibly meant to rein it in is common in big business circles. Dominant companies know that high barriers to entry helps to exclude new competitors. While they raise costs for upstarts, the industry hides behind the (dishonest but effective) argument that some of the regulations are in the public interest, and the (valid) claim that the rules ought to apply equally to everyone.

This leads to the third reason the industry claims to support the government’s anti-smoking policy. It believes something else entirely is “the single biggest threat to the sustainability of the legal tobacco industry, eroding the market share of legitimate players and [government] revenue alike.”

The tobacco industry’s biggest enemy turns out not to be anti-smoking taxes or laws, but competition. Primedia’s Crime Line, as unofficial public relations agent for the TISA conference, explained: “The illicit tobacco trade is a major problem.”

Sharp as a tack, Kanthan Pillay, the CEO of Yfm, was first on the button: “No. Sin taxes are the problem.”

Smuggling never happens in an industry that doesn’t suffer from high taxes, monopoly abuse, or both. It is a problem for the government because smugglers don’t pay tax. It is a problem for the industry because smugglers undercut them. But the reason the so-called “black market” thrives in the first place is that prices are too high in the formal market. If cigarettes were priced competitively in a free market, there would be no need for an informal, parallel market.

A study by University of Stellenbosch economists Craig Lemboe and Philip Black found “that the level of cigarette smuggling in South Africa is in fact significant, constituting between 40% and 50% of the total market, and that cigarette tax hikes have to a large extent contributed to its continued existence and growth by creating a financial incentive to smuggle”.

Smoking rates are highest among those who have had the least education and are in the lowest socio-economic groups, according to research in high-income countries. So sin taxes hit the poor hardest.

According to Lemboe and Black, “there is also much evidence indicating that illegal cigarettes are of inferior quality which, combined with the tax induced shift to smuggled cigarettes, suggests that cigarette tax hikes could have the perverse effect of raising rather than lowering the overall negative externality.”

Van Walbeek’s work adds another revealing perspective, namely that smuggling can be a means for a competitor to enter the market. The motive for the local tobacco industry’s fight against “illicit” cigarettes may have a lot more to do with keeping a major international competitor, Philip Morris, seller of the popular Marlboro brand, out of the market. Considering that 95% of the local market is controlled by BAT, the anti-smuggling campaign can be seen as a defensive strategy by a monopoly.

This raises the interesting question: did smoking prevalence really decline, or is the apparent success of the public policy intervention merely a symptom of having driven it underground, where both smokers and cigarettes are harder to count? The poor appear to have quit smoking at a much faster rate than the wealthy, which suggests a high level of price sensitivity. But did they stop smoking, or turn to cheaper alternatives on the informal market?

That is, do sin taxes actually achieve the stated public policy purpose of reducing consumption?

The excise tax on tobacco is revised every year, and calculated as a percentage of actual tobacco product prices. It acts like an ad valorem tax, that has been stable at 52% for years. Considering that the cost of production has not increased, one can only conclude (as Van Walbeek and others do) that the tobacco industry has been pushing up the price of its own product. Being restricted in growing the market by means of marketing, the tobacco industry is relying on higher prices to maintain its profitability. In fact, the price of cigarettes has risen by 18c for every 10c the excise tax increased.

The industry clearly does not share the government’s view that raising the price of cigarettes threatens consumption levels.

On the contrary, according to a report in City Press last year, the industry believes that smoking has actually increased, despite attempts to suppress it. It bases this claim on an estimate that the “illicit” market represents about 30% of legitimate market volume. You might not believe the industry (and many do not), but its own price increases put its money where its mouth is.

The history of alcohol prohibition is instructive. It was counter-productive, leading to flourishing illegal drinking establishments. It raised prices and reduced quality, often to dangerous levels. It threw thousands of people out of jobs. It spawned widespread political corruption, and gave organised crime syndicates a rich source of revenue. It made criminals of millions of decent citizens. The only good thing prohibition did was give the bad guys bigger guns and faster cars than the police, which made for great movies.

With tobacco, we have a similar situation. It is far from clear that tobacco legislation and taxation achieves any of its intended purposes. On the contrary, evidence suggests that they have merely driven a large part of the industry underground, instead of reducing smoking. Although it brings in tax revenue, it hits the poor the hardest, and in any case, none of it is ring-fenced for public health. Anti-smoking policy is an ill-disguised fig leaf for profiteering and protectionism, by and of the tobacco industry.

If you think “illicit tobacco trade is a major problem”, you’ve swallowed the spin of a monopoly industry that uses its cosy relationship with government to keep competition at bay.

I have nothing against tobacco companies, but last I checked we had good reason not to believe a word they say. What irony that a media organisation, after decades of outrage over tobacco industry deceit, has been lulled into such gullibility by its activist wing. DM

Ivo Vegter

Ivo Vegter

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

Get overnight news and latest Daily Maverick articles

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.